Antifragility, Optionality and Value of Small Bets

Nima Elyassi-Rad
Sep 22, 2016 · 3 min read

In Antifragile, Nassim Taleb starts with stating the obvious: fragile things are harmed by volatility. But what do you call something that benefits from volatility? He called this phenomenon Antifragile.

Note that, stable is not the opposite of fragile. Something that’s stable may be less harmed (or not harmed at all) than something that is fragile. But stable things don’t benefit from volatility.

Young companies, aka startups, are by virtue of their age more susceptible to harm from volatility i.e. they are less stable. Older and more established companies with diversified revenue streams (think Bosch and P&G) are more stable than a startup. Of course, even more established companies have fragile units which is why startups take on bigger companies but they’re not always taking on the whole of the big company but rather one or perhaps a few of the units.

So, as a startup, how do you make yourself antifragile?

Any strategy with optionality is like a highway with multiple exits — Nassim Taleb

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Optionality and taking small bets (with preferably unlimited upside and limited downside) is the best route to prepare yourself for the random events that await you. In preparing for volatility in this manner, you give yourself the chance to not only withstand but to succeed and prosper in a big way.

But what is (financial) success and failure for both founders and investors?

For a founder and/or business this typically means 1/ building a profitable and cash flow generating business 2/ selling your business for a price that captures the upside or 3/ going public. If you bootstrap a profitable business i.e. you don’t sell any ownership in your business to outsiders thus you have full control of your business/destiny, then you’ve achieved true optionality.

Here’s a not-controversial statement: death, aka running out of cash aka not being able to keep the lights on, is the worst thing that can happen to your business. Thus the best chance you have to bullet proof your business against running out of cash is by way of achieving profitability. At the risk of sounding redundant, when you’re profitable (and assuming you’ve good unit economics), then and only then you’ve full optionality.

Financial success or failure varies for each investor. It typically depends on their fund size and the expectations of their investors (yes, investors also have investors).

As you continue to grow your business, at some point you’ll start pondering how outside capital might help you grow your business more.

All outside capital has a cost. In the spectrum of financing, debt typically has the lowest cost of capital (bank and SBA loans) and equity financing (VC) has the highest cost of capital.

Seed investing began as a way to create optionality for founders, by bridging the gap between angel investors and VCs. As the OG’s of the seed game have taught me, the purpose of seed funds were to enable founders to make a few more bets and run a few more experiments in hopes of putting themselves in a position to accelerate with a larger round of funding, find an acquisition partner, or achieve profitability and not require any further funding.

Fast forward 12 years and seed investing is no longer what it used to be, partly because seed funds have grown larger in size, e.g. > $100mm (are we still calling these seed funds!?), and now require bigger economic outcomes to generate their returns.

Success for a traditional venture fund with > $100mm in AUM is that some day you’ll float your business on a public stock exchange. More on traditional VC math here and here.

The situation we’re in is exactly why was founded. To resurrect the spirit of the original seed funds. To bring back the quintessence of experimentation and small bets. To create optionality for founders and investors.

If building an antifragile (aka profitable) business excites you as much as it does us, we should talk.

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